Lampert’s Letter To Associates: "No Direct Reports"

To: All Sears Holdings (SHLD) Associates

From: Edward S. Lampert, Chairman of the Board

“Today we announced that Bruce Johnson, currently our executive vice president for supply chain and operations, will serve as Sears Holdings’ interim chief executive officer and president, replacing Aylwin Lewis, who will step down in February.

I want to thank Aylwin for his dedication and leadership since joining as the chief executive officer of Kmart beginning in October 2004. He led the integration of Kmart and Sears and helped meld these two cultures. He has exemplified the qualities that are core to our company and its principles: hard work and ethical leadership. I have enjoyed working with Aylwin over the last three years and I appreciate his contributions to the company and the support he has provided me personally.

Indeed, we appreciate the hard work and efforts of all Sears Holdings associates. We know we are facing a difficult macroeconomic and retail environment, but we also expect to come out of these challenging times as an improved and stronger company. As we recently explained, we are implementing some significant changes to our organizational structure which will bring us to the next phase in our company’s history. In light of these changes, the Board and I believe that now is the right time to put in place new leadership to take the company forward and therefore we have begun a formal search for a new chief executive.

We are fortunate that we have such a strong interim leader in Bruce Johnson. Bruce will begin implementing the important organizational changes that will allow our business units to operate with greater independence, focus, and efficiency. Bruce is an experienced retail executive. He joined Kmart in 2003 after five years at French retail chain Carrefour, where he served as director, organization and systems and as a member of the management board. Before that, Bruce spent 16 years at Colgate-Palmolive in various positions. Bruce has worked hard not only to integrate and improve our supply chain and increase our direct sourcing of product, but in 2006 took responsibility for store operations as well. As interim CEO, Bruce will oversee the separate business units we announced last week.

I will continue to lead the Office of the Chairman and focus on identifying and attracting talented executives to our company, including the search for a new chief executive officer. I will also work to ensure that our new structure supports our objectives of greater accountability, faster decision-making, and increased profitability. I believe the reorganization will allow our leaders to be more productive and efficient and allow us to attract talented executives who are eager to take on the challenges of running their own businesses. As a result of these structural changes, I will no longer have any direct reports.

Given the number of changes that we have announced in recent weeks, I would like to provide you with some context for what is happening both at our company and within the markets generally and remind you of what we have accomplished thus far.

Most of you know from the news that the U.S. economy is facing significant difficulties and we are seeing a broad-based retail slowdown. We have also experienced disappointing financial performance in our business in this current fiscal year. However, we have significant opportunities and we must remain steadfast and resolute in our goal of becoming a great retailer.I never underestimated the enormity of the challenges facing Kmart and Sears and the hard work it would take to achieve our goal. I remain confident in our ability to ultimately succeed, even if there are steps backward along the way. We have been willing to make tough decisions and choose a different path from many of our peers and continue to do so. The leadership changes and the reorganization are examples of the important and necessary next steps to achieve our goals.

As you all know, both Kmart and Sears have been through many years of struggles. Those of you who were at Kmart before 2003 helped the company emerge from bankruptcy, despite the predictions of virtually all retail experts at the time. In fact, many of these experts predicted that the company would not survive at all. Instead, Kmart went from a company that lost over $1 billion in both 2001 and 2002 to a company that made almost $1 billion in 2004. Now, almost five years after emergence, Kmart still operates over 1300 stores throughout the United States, making it one of the largest retail companies in the country.

For the past three years, all of us have been charged with the very challenging task of integrating two very large companies. Each of you has made important contributions to this enormous endeavor. While we have a long way to go, you should take great pride in what you have accomplished to date. In fact, since May 2003, shares of what is now Sears Holdings have increased in value by almost ten times. It is easy to lose sight of how much value has been created over the past five years during a time of stock market uncertainty and tumult. Sure, our stock is off its highs, just like many department stores and other retail companies, but our shareholders have been richly rewarded over the past half decade.

While we continue to recognize and address the challenges ahead of us, we can also be proud that, thanks to our collective efforts, we saved almost 150,000 jobs in taking Kmart out of bankruptcy, a fate from which many retailers have failed to recover. Importantly, we also continue to believe that we can mold Sears Holdings into a successful, sustainable, and exciting company that will offer a compelling choice to customers. There will be many difficult decisions to come and the recent economic downturn which has affected practically all retail companies has set back our progress. However, it has not deterred us and we will continue to move forward with our strategy and take all appropriate actions to stabilize our business.

Sears Holdings is one of the largest retail companies in the world, one of the largest employers in the world, and one of the most profitable retail companies in the world. We remain focused on the creation of long-term value for our shareholders and have shown our ability to deliver since Kmart’s emergence from bankruptcy. We feel that we have been very successful so far, yet success doesn’t come without setbacks. We intend to make decisions to increase the probabilities of success in the future, although certainly not all decisions will lead to the outcomes we expect.

Our belief in our company is reinforced by the fact that we have invested over $4 billion since the third quarter of 2005 in repurchasing our own shares, while at the same time paying down debt and funding our pension plan. We have believed that investing in our own company stock has been a superior alternative to acquiring other businesses, and it has not prevented us from making investments in our stores and infrastructure. During that time we have also made significant investments in information technology as well as in building our design and online capabilities. However, making these investments requires us to believe that we will earn a return on them. We are not going to simply throw money at problems, as some have suggested and as others have done unsuccessfully. Instead, we are going to test and learn and when we find things that we believe can make a difference – such as Lands’ End shops inside Sears for example — we will roll them out aggressively and iterate along the way.

We are early in the game, and thanks to all your efforts, we have a great chance of victory. On behalf of the leadership of our company, thank you for your hard work and commitment, and we look forward to building a great company with your help.”

The basic summation of the letter around the web is that this letter is an admission of Lampert’s failure. That he will “no longer have any direct reports” somehow means that his vision has not succeeded.

What is missed is that shareholders who have been with him are still up ten-fold in their shares. Lampert and his discipline were precisely what both Sears and Kmart needed when he bought them. Let’s not forget (it seems to have been) that both of these chains were on the road to extinction 5 years ago. Now they produce $50 billion in sales.

What the letter means is that Lampert recognizes he has taken the chain as far as he can. He knows what his strengths are and also is, as Berkshire Hathaway’s (BRK.A) Warren Buffett has said, “smart enough to know what I don’t know”. Now, was this “the plan” all along? Who knows. But, if you look at how far Sears seems to be in the process already, one can only assume that this has been in the works for a while.

My gut says Lampert knew this day was coming and had the reorganization plans “on the back burner”. The current state of retail in general and the US economy as a whole probably expedited their implementation.

Far from being an admission of failure, Lampert’s move is simply a very smart man placing ego aside and doing what is best at this time for his company. Why is that a bad thing?

Disclosure (“none” means no position): Long Sears